Genentech Write Up
Brandon Peay
Having worked in the pharmaceutical field for the last eleven years, I feel somewhat knowledgeable about this topic. Biological medicine and biologics in general are very expensive to produce. The manufacturers have to spend a LOT of money just on research and development, and even then it isn’t a sure thing that their therapy will be effective, or even safe for that matter.
Most people know Roche for two things: Tamiflu and Accutane. Tamiflu is of course for the flu, while Accutane is for Acne. At the beginning part of this decade, it was found out that Accutane can cause increased risk of colon cancer and other colon-related disorders. This really hurt Roche as a company, both financially and from a public relations standpoint. We really couldn’t go by in the late evening hours without seeing these “bad drug” commercials saying if you or a loved one was hurt by Accutane, please call. Tamiflu also received some bad press during the swine flu outbreak, with reports of psychosis that may have been linked to the drug being used in children, teens, and adolescents. Both Roche and Genentech are in an extremely risky industry so that they have to follow standards and practices down to a pinpoint dot.
In 2012, the article states that just from patent expiration, the industry as a whole was going lose approximately 65 billion dollars. Granted, that is bad news for the companies in the industry, but good news for both insurers and patients who may desperately need the medication but can’t afford it. Big Pharma really doesn’t care about patients’ finances or the ability to pay. The way they see it, if they need the drug bad enough, they will find a way to pay for it, or unfortunately die.
Genentech’s niche in the pharmaceutical marketplace was to focus on “applying leading-edge scientific knowledge to discover and develop first- or best-in-class medicines.” This is a huge claim in this industry. Being the “first” class of drug on the market is a huge expenditure for the company. It could have been a huge economic weakness for the company, but they were able to recruit some of the brightest minds in the industry for their research and development. In three years (2005-2008) they were able to double their revenues! Their financial forecasts were extremely optimistic, with some estimates with compounded interests at 12-15%. This is an extremely aggressive figure. These figures were due to an aging population which historically has had an increased incidence of cancer.
Upon completely a preliminary PEST (Political, Economical, Sociocultural, and Technological) analysis of the current operations of the company, we find that it is in the company’s best interest to continue on its current track.
As with any health care industry, regulation, most notably federal, is extremely strict. All therapies presented to the FDA must go through 3 phases of clinical trials, with just one disdainful mistake could cause millions, and even billions, of dollars to go to waste on this new therapy which may save lives, but just one bad amino acid sugar or a nucleotide could cause some mutation in a patients DNA and the therapy would have to be reworked, costing the company even more money, which passes to either the insurance company of the patient who will end up buying this, being charged a higher copay, or even a sunk cost to the company with abandoning the project, which a complete worst case scenario. The problem for companies in this industry are the regulations set in place by the Food and Drug Administration. This organization assures safety and efficacy of products by a submission process and clinical trials prior to being released to the public, and even after release, they have regulation over the product and can request to the company to pull the product after the release, which was the case of Avandia (Rosiglitazone) due to the possible increase of heart problems.
Technology is another huge investment in this industry. Having a computer do the work of analyzing possible issues with a new medication vs having it going out into a clinical trial and causing some type of unknown havoc is worth investing in. Technology and research and development really go hand-in-hand. As more and more complex therapies are proposed by scientists, new technology will need to be developed to formulate complex chemical combinations like C6--H12--O6 (Glucose, also known as sugar), and the development and implementation of this technology will most likely not be cheap, as the scientists will have to tell the programmers what they need in the application and there will be a lot of trial and error, many hours/days/weeks/months writing code, and unforeseen glitches and bugs in the program can cause even more delays and expenses continue to pile up which will eventually get passed on to the consumer. This could put the company in a disadvantage when it comes to being able to market their product to doctors, especially when they ask about cost. Granted, the drug representatives could lie, but that is extremely unethical. When doctors and staff have to do additional paperwork to try to get medication covered, that wastes time for the patient and time and costs for the doctor’s office.
Assuming a company has the massive amount of start-up capital, or is able to persuade drones of investors or venture capitalists to invest in this, it is extremely unattractive when it comes to start-up costs. The barriers to entry are also extremely high, with different patents for products that the company has to apply for, along with government regulations set forth by the FDA for safety and efficacy. The industry has consolidated lately with Roche acquiring Genentech to enhance all qualities of the business, along with some other acquisitions. Also, the threat of substitutions is extremely high in the industry. Once approximately seventeen years passes from the initial filing of a patent for a drug, then generic manufacturers can start making your product, which keeps drug makers on their toes to research and create new therapies to make sure that generic companies don’t start stealing (not technically stealing, of course) your product with a flood of cheaper medicines in the marketplace. Patent infringement has happened within the last ten years with two very popular drugs. OxyContin, the potent pain killer produced by Purdue Pharma, was made by a few generic manufacturers for a few years, and Purdue took these companies to court, and after a few years, they reformulated their product to make it harder to abuse, which let the FDA provide extra time on the patent for the product. Another example is Plavix; which is an anti-platelet drug, had its patent infringed upon by the generic drug maker Apotex back in 2006. I remember this very well, as a lot of people were very upset when the generic medication was pulled off the market and had to go back paying higher prices for the brand-name. It requires a lot of upkeep to keep the external threats under control so that your products aren’t made into cheaper formulations of themselves, or convince medical professionals that the brand-name product works better than its generic counterpart.
When it comes to the power of buyers, patients have very little say in the price of these new therapies that come on the market. The patients are at the will of the suppliers, which can charge basically whatever they want for their product. With the passage of the Affordable Car Act, most individuals are required to have insurance, with the exception of some rare cases. This could cause the ability of patients to purchase the medications, but at an increased risk of higher co-pays, higher insurance premiums, and even drug formulary blockage. The existing competition among pharmaceuticals and biotechnology is becoming harder to contain with companies that are getting larger. There isn’t enough supervision of the scientists, and all it takes is just one key scientist to disagree with the group to basically destroy a team project that could be extremely beneficial to the company.
Genentech will have to use its resources within Roche to make sure that it can keep its research scientists motivated in creating new products and recruiting new and aspiring scientists to join their team. Their scientists are the company’s most valuable asset. Genentech wanted to hire the best in doing their own research. The researchers are free to go in their own direction of research of whatever interests them. Their scientists are also rare in that they hold an enormous amount of patents, along with peer-reviewed articles/journal entries in extremely high regarded journals such as the Journal of America Medical Association. Genentech’s founder, Herbert Boyer, also holds one of the first major patents along with Stanley Cohen with the recombinant DNA cloning patents. No one can mimic this patents, and if they do, then the infringer would have to pay a lot of royalties and possibly have to face legal action in court. The original patents on this type of technology means that Genentech have a huge competitive advantage with this field of medicine. Genentech is also organized to capture value. They create projects based on critical medical needs, scientific rationale, adequate market protection, and significant market opportunities. Viewing historical tends is key for forecasting what will be needed in both the near-future and the long-term.
Roche/Genentech’s new building increases the ability of scientists to complete more work. Their scientists are also one of the biggest strengths, as they can take the existing technology of recombinant DNA products like Tarceva and tweak it to be able to market a new product to go after different forms of cancer. Although the acquisition was viewed positively externally, internally the two business models were different. Genentech was focused on research and development, which is just one of the key sources of being in the pharmaceutical business, while Roche just cared about marketing and commercializing products. What good does marketing and commercializing do if you don’t have the product to give to the consumer? Roche needs to integrate the research and development of Genentech to create new and better products for the market. The opportunity is there to diversify their drug investment by decreasing what they researched in oncology, with other unique diseases such as cystic fibrosis. The combined company just needs to be able to integrate their resources into one large pool, keep a vision for the future, and enjoy the profits that are ahead.